How Many Stocks Do You Need to Be Diversified?

With equity valuations at historically high levels and bond yields at historically low levels, investors are searching for alternatives to the traditional 60% stock/40% bond portfolio. Alternative investments such as reinsurance and marketplace lending provide diversification through exposure to different forms of risk.

AAII’s president John Bajkowski and AAII Journal editor Charles Rotblut talk with Mark Hulbert who, for nearly 40 years, has been evaluating the performance of investment newsletters. They discuss the big lessons Hulbert has learned from tracking investment newsletters and their recommendations over the years as well as suggestions for those contemplating following an investment newsletter.

It has become conventional wisdom that diversification beyond 10 or 20 securities is unnecessary. But a fresh look at the research indicates that you will need many more stocks to be truly diversified. The major reason for the confusion rests with the interpretation of many of the studies that have examined the relationship between the risk of a portfolio and the number of securities that it holds. This article sets out to clarify the previous findings by taking a fresh look at this relationship.

Financial firms can add, at best, only a small value by buying and combining securities into a portfolio. Many investors haven’t thought about this, but it explains why investments and products with commissions should be avoided.

Vote to answer this week’s Special Question: Are you looking for new ways to diversify your portfolio? If so, how?

Last Week’s Results:

This week the “most hated bull market in history” also becomes the longest, by most measures. On August 22, barring a meltdown in the S&P 500, the index will have gone 3,453 days without a decline of 20% or more, dating back to the index’s bear-market low on March 9, 2009, in the midst of the worst global financial catastrophe since the Great Depression. The economic meltdown of 2007–2008 hit many investors. Last week’s survey question asked our readers how much the Great Recession impacts financial decisions they make today and the special question asked what steps readers have taken to better protect themselves from the next financial downturn.

“Easier said than done” is a common saying that applies well to developing an overall strategy for your investment portfolio. The basic concepts are relatively easy, but they become more complex and less clear-cut when it comes to applying them to real-world situations. This e-book, available exclusively to AAII members, is designed to bridge the gap between theory and practice.

The AAII Weekly Digest is one of the many benefits of AAII membership. To learn more, consider a 30-day Trial AAII Membership to start becoming an effective manager of your own assets.